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Investment Firms Eye Troubled Tech

Some private investment firms see dollar signs in troubled technology and telecom companies and are getting ready to buy. A small batch of equity firms were gearing up to purchase valuable yet struggling companies before the Sept. 11 terrorist attacks, an

Some private investment firms see dollar signs in troubled technology and telecom companies and are getting ready to buy. A small batch of equity firms were gearing up to purchase valuable yet struggling companies before the Sept. 11 terrorist attacks, and still believe in the bet.

Firms such as Accel-KKR Telecom, The Carlyle Group and Platinum Equity have added technology and telecom experts to their ranks so that they can competently evaluate the same struggling companies that many of their peers have abandoned.

"The irony of all this is that telecom is still a wonderful market," said James Attwood, head of The Carlyle Groups global telecom and media division. "The baseline fundamentals are still there. Thats why were still excited - long term, we see growth."

Platinum Equity has similar views on telecom. "Its a market that, over time - even though it was overaggressive in expansion and investment - is one thats going to increase in terms of importance to the enterprise," said Phil Norment, who heads Platinum Equitys mergers and acquisitions operations. Platinum Equity has bought two divisions from ADC Telecommunications, and has purchased businesses from AT&T, IBM, Motorola, Williams and WorldCom.

Further reading

Some I-managers may be wary of hiring vendors backed by equity firms. "If a company is purchased by a buyout firm, it means its a work in progress," said Bill Lesieur, an industry analyst of Technology Business Research. However, companies bought by equity firms can also be judged as having merit and relatively secure financial backing.

"If somebody with deep pockets supports them, it gives them more comfort that these service providers will be around," Attwood said.

Platinum Equitys companies produce $3 billion in combined revenue, with funding coming from CEO Tom Gores. The Carlyle Group manages $12.5 billion in private equity from more than 435 institutional and private investors.

The Sept. 11 attacks may have actually boosted the perceived value of telecom. "Ironically, the one thing it did was underscore how important communications is for society. People realized they take that for granted," Attwood said.

Those words come in sharp contrast to market facts. In the past year, a slew of telecom operators and vendors have gone under or filed for bankruptcy, including DSL wholesalers, fixed wireless providers and Web hosters.

Such tough times are good news, though, for equity firms that can buy struggling companies on the cheap and sell them for a profit in the future. "Theres no question this is a great time to buy telecom companies," said Arun Sarin, CEO of Accel-KKR Telecom, a firm created in July specifically to buy troubled telecom companies.

Accel-KKR Telecom has not made a purchase yet, and The Carlyle Group hasnt made any significant buys recently. "Everyone is waiting for them to pounce," Lesieur said.

Equity firms can afford to be patient because they dont have much competition. Some onlookers are concerned that struggling yet quality firms might unnecessarily fail because established technology companies are strapped for cash and not likely to buy.

"Its bad that these firms, who are in the best position to know the future potential of some of these smaller companies, dont have the wherewithal to buy them," said Samuel Hayes, a Harvard Business School professor of finance.